Previous Year Question
Which one of the following statements appropriately describes “Fiscal Stimulus”?
It is a massive investment by the Government in the manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth.
It is an intense affirmative action of the Government to boost economic activity in the country.
It is the Government’s intensive action on financial institutions to ensure the disbursement of loans to agriculture and allied sectors to promote greater food production and contain food inflation.
It is an extreme affirmative action by the Government to pursue its policy of financial inclusion.
Correct Answer: B
Detailed Solution
Fiscal Stimulus refers to an Expansionary Fiscal Policy adopted by the Government to increase Aggregate Demand and economic activity during a slowdown or recession.
Its two principal instruments are:
An increase in Government expenditure
Tax reductions or concessions
Option (b) is correct
During an economic slowdown, households may reduce consumption and businesses may postpone investment. Consequently:
Aggregate Demand declines.
Production contracts.
Capacity Utilisation falls.
Employment and incomes come under pressure.
The Government may respond by:
Increasing Infrastructure Expenditure.
Advancing Capital Expenditure.
Temporarily reducing Tax Rates.
Providing Tax Rebates or Investment Incentives.
Increasing income support and social transfers.
Providing additional grants to States.
Government expenditure becomes income for households and enterprises. When part of that income is spent again, it can produce a Fiscal Multiplier effect.
If additional Government expenditure of ₹100 crore increases National Income by ₹150 crore:
Fiscal Stimulus is therefore an active Government intervention intended to revive economic activity.
Option (a) is incorrect
Fiscal Stimulus is not restricted to large Government investment in the manufacturing sector. It may cover:
Construction
Transport
Health
Education
Rural development
Tax relief
Income transfers
Moreover, the option refers to a demand surge caused by rapid economic growth, whereas Fiscal Stimulus is generally introduced during an economic slowdown or recession.
Option (c) is incorrect
Greater lending by financial institutions to agriculture represents a Credit Policy or sectoral credit intervention. It is not necessarily Fiscal Stimulus.
If RBI increases liquidity or reduces Policy Rates, it constitutes Monetary Stimulus. Fiscal Stimulus specifically involves Government decisions concerning taxation, expenditure or borrowing.
Option (d) is incorrect
Financial Inclusion seeks to expand access to banking, credit, insurance, pensions and payment services.
Although it is an important development policy, it is not equivalent to Fiscal Stimulus.